Power Tariff Must Be Cost-Reflective; Allow DisComs To Recover Revenue Shortfalls Within 4 Years : Supreme Court To Electricity Regulatory Commissions

In a significant ruling on Wednesday (August 6), the Supreme Court held that regulatory assets created by the Electricity Regulatory Commissions (“ERCs”) to shield consumers from immediate tariff hikes should not remain unresolved for extended periods. The Court directed that future regulatory assets must be liquidated within three years, while existing ones must be cleared within four years.

The Court also directed all State Electricity Regulatory Commissions (SERCs) to submit detailed time-bound roadmaps outlining the schedule for regulatory asset liquidation, including the associated carrying costs.

In brief, 'Regulatory Assets', created by the ERCs, are deferred revenue gaps costs already incurred by DISCOMs (Distribution Companies) but not immediately recovered through consumer tariffs. They are meant to shield consumers from sudden tariff spikes by postponing recovery to future years.

Explaining the concept, the judgment stated :

"A “regulatory asset” in the context of tariff determination for electricity utilities is an intangible asset that is created by the Regulatory Commissions in recognition of an uncovered revenue gap or revenue shortfall when a distribution licensee could not fully recover the costs reasonably incurred by it through revenue from tariff. This portion of the revenue requirement is not included while determining the tariff for the particular year. Rather, the distribution company is entitled to receive or recover such revenue in the future, over a period of time."

The Court stated that the creation and continuation of a regulatory asset is neither a statutory concept nor a power granted under the Electricity Act. Rather, it is a measure adopted by the Regulatory Commissions, which are statutory bodies, in exercise of their powers and functions under the Act.

The judgment delivered by the bench of Justices P.S. Narasimha and Sandeep Mehta came as a relief for Delhi's power distribution companies (DISCOMs), which had challenged the Delhi Electricity Regulatory Commission (DERC) for repeatedly deferring the liquidation of regulatory assets. These assets, initially created as a temporary measure to shield consumers from tariff hikes, were left unliquidated since 2004, depriving the DISCOMs of cost recovery. This prolonged deferral resulted in a staggering ₹27,200.37 crore in unliquidated regulatory assets across the three DISCOMs, severely hampering their operations and triggering a cash crisis.

Against the ballooning of regulatory assets amount and the need for timely determination of the tariff rates by the ERCs, the court observed :

“A Regulatory Commission's power to create a regulatory asset is part of the tariff fixation process, as long as it is in reasonable measure. However, in an egregious situation where the regulatory asset has grown beyond proportion and is also extended from time to time inefficiently, there is a compelling need to deal with it. In this context, the Regulatory Commissions have twin obligations: first, the Commission must enable an efficient and effective recovery of the regulatory asset by the utility, and second, more importantly, it must manage the regulatory asset in a manner that does not transgress the principles that inform and govern tariff determination. The regulatory asset cannot be permitted to balloon into such proportions or continued for such periods, year after year, that the governance of the sector is set in peril, affecting the rights of the utilities and at the same time jeopardising the consumer interest, who eventually end up bearing the burden. Creation, management and dissolution of regulatory assets are subject to law and regulation. In performance of these duties, the orders of the Regulatory Commissions are subject to the orders, instructions, and directions of the APTEL issued in exercise of its statutory powers. When they fail to comply with these statutory and other requirements, one can infer regulatory failure.”

The Court issued the following directions:

"(i) As a first principle, tariff shall be cost-reflective;

(ii) The revenue gap between the approved ARR (Annual Revenue Requirement) and the estimated annual revenue from approved tariff may be in exceptional circumstances;

(iii) The regulatory asset should not exceed a reasonable percentage, which percentage can be arrived on the basis of Rule 23 of the Electricity Rules that prescribes 3% of the ARR as the guiding principle;

(iv) If a regulatory asset is created, it must be liquidated within a period of 3 years, taking Rule 23 as the guiding principle;

(v) The existing regulatory asset must be liquidated in a maximum of 4 years starting from 01.04.2024, taking Rule 23 as the guiding principle;

(vi) Regulatory Commissions must provide the trajectory and roadmap for liquidation of the existing regulatory asset, which will include a provision for dealing with carrying costs. Regulatory Commissions must also undertake strict and intensive audit of the circumstances in which the distribution companies have continued without recovery of the regulatory asset;

(vii) Regulatory Commissions shall in general follow the principles governing creation, continuation and liquidation of the regulatory asset, as laid down in paragraph 70, and also abide by the directions of the APTEL summarised in paragraph 69.8;

(viii) The APTEL shall invoke its powers under Section 121 and issue such orders, instructions or directions as it may deem fit to the Regulatory Commissions for performance of their duties with respect to regulatory asset as enunciated by us in this judgment and as per the orders of the APTEL in O.P. No. 1/2011 dated 11.11.2011 and O.P. Nos. 1 and 2/2012 dated 14.11.2013.

(ix) The APTEL shall register a suo moto petition under Section 121 of the Act to monitor implementation of above directions (v) and (vi) till the conclusion of the period mentioned therein."

Ensuring that the ERCs should not deprive of the cost incurred by them for years in form of creation of Regulatory Assets, whose creation is permissible only in exceptional circumstances like natural disaster and not in routine fashion, the Court directed the Appellate Tribunal for Electricity (“APTEL”) to monitor the compliances of the Court's direction by the ERCs, that whether they are determining the tariff's in timely manner or not.

“We reiterate that the Regulatory Commissions must call for ARR, ensure that tariffs are determined, and that truing up is conducted in a timely manner, by exercising suo motu powers if necessary. In case of non-compliance with these directions, the APTEL has the power and duty to call for an explanation, ensure accountability, and monitor compliance by the Regulatory Commissions. Similarly, the APTEL must exercise its powers under Section 121 to ensure that the legal principles on regulatory asset laid down by us in paragraph 67.3 hereinabove are complied with by the Regulatory Commissions, and it must monitor the same. In case of non-compliance, the APTEL must issue such orders, directions, or instructions to the Commissions as may be necessary to hold them accountable.”, the court said.

Cause Title: BSES RAJDHANI POWER LTD. & ANR. VERSUS UNION OF INDIA AND ORS. (and connected matters)

Citation : 2025 LiveLaw (SC) 780

Click here to read/download the judgment

Appearance:

For Appellant(s) : Mr. Abhishek Manu Singhvi, Sr. Adv. Mr. Shri Venkatesh, Adv. Ms. Kanika Chugh, Adv. Mr. Asutosh Kumar Srivastava, Adv. Mr. Shryeshth Ramesh Sharma, Adv. Mr. Bharat Gangadhar, Adv. Mr. Nihal Bhardwaj, Adv. Mr. Kartikay Trivedi, Adv. Mr. Aashwyn Singh, Adv. Mr. Abhishek Nangia, Adv. Mr. Aadarsh Singh, Adv. Mr. Nitin Saluja, AOR Mr. Kapil Sibal, Sr. Adv. Mr. Buddy A. Ranganadhan, Sr. Adv. Mr. Amit Kapur, Adv. Mr. Pukhrambam Ramesh Kumar, AOR Mr. Anupam Varma, Adv. Mr. Rahul Kinra, Adv. Mr. Aditya Ajay, Adv. Ms. Isnain Muzamil, Adv. Mr. Girdhar Gopal Khattar, Adv. Mr. Sanjay Nair S, Adv. Ms. Manisha Singh, Adv. Ms. Shefali Tripathi, Adv. Mr. Aditya Gupta, Adv. Mr. Karun Sharma, Adv. Ms. Rajkumari Divyasana, Adv. Mr. Kapil Sibal, Sr. Adv. Mr. Buddy A. Ranganadhan, Sr. Adv. Mr. Amit Kapur, Adv. Mr. Anupam Varma, Adv. Mr. Rahul Kinra, Adv. Mr. Aditya Gupta, Adv. Mr. Aditya Ajay, Adv. Mr. Sanjay Nair S., Adv. Ms. Isnain Muzamil, Adv. Ms. Manisha Singh, Adv. Mr. Girdhar Gopal Khattar, Adv. Mrs. Shefali Tripathi, Adv. Mr. Sanjay Nair S, Adv. Ms. Manish Singh, Adv. Ms. Shefali Tripathi, Adv. Mr. Avinash Das, Adv. Mr. Sidharth Sethi, AOR

For Respondent(s) :Mr. K M Nataraj, A.S.G. Mr. Gurmeet Singh Makker, AOR Mr. Piyush Beriwal, Adv. Mr. Shyam Gopal, Adv. Ms. Shradha Deshmukh, Adv. Ms. Chinmayee Chandra, Adv. Mr. Rajat Nair, Adv. Mr. K. V. Mohan, AOR Mr. Satya Mitra, AOR Mr. Vivek Singh, AOR Mr. Ritik Dwivedi, Adv. Mr. Siddhartha Chowdhury, AOR Mr. Anand Ganesan, Adv. Ms. Swapna Seshadri, Adv. Mr. Pramod Dayal, AOR Mr. Nikunj Dayal, Adv. Mr. Utkarsh Singh, Adv. Mr. R. Venkataramani, Attorney General for India Mr. S. Wasim A. Qadri, Sr. Adv. Mr. Lakshmi Raman Singh, AOR Mr. Tamim Qadri, Adv. Mr. Chitvan Singhal, Adv. Mr. Saeed Qadri, Adv. Mr. Shraveen Kumar Verma, Adv. Mr. Saahil Gupta, Adv. Mr. B. Krishna Prasad, AOR Ms. Prerna Singh, Adv. Mr. Guntur Pramod Kumar, AOR Mr. Samarth Krishan Luthra, Adv. Mr. Dhruv Yadav, Adv. Mr. Nikhil Nayyar, Sr. Adv. Ms. Pritha Srikumar Iyer, AOR Mr. Naveen Hegde, Adv. Mr. Kshitij Maheshwari, Adv. Mr. Abhyudaya Shishodia, Adv. Mr. Saumya Sinha, Adv. Ms. Saumya Sinha, Adv. Mr. Abhishek Vikas, AOR Mr. Adarsh Tripathi, AOR Mr. Vikram Singh Baid, Adv. 4 Mr. Ajitesh Garg, Adv. Mr. Veevak Goel, Adv. Mr. B. K. Satija, AOR Ms. Pallavi Langar, AOR Mr. Vishnu Sharma, Adv. Mr. Sujeet Kumar Chaubey, Adv. Mr. Ravi Sharma, AOR Mr. Aryan Chanda, Adv. Mrs. Shirin Khajuria, Sr. Adv. Ms. Bhavana Duhoon, AOR Ms. Swati Tiwari, Adv. Mr. Naveen Kumar, AOR Ms. Stuti Bisht, Adv. Mr. Nitesh Bhandari, Adv. Mr. Maitreya, Adv. Mr. Shourajeet Chakravarty, Adv. Ms. Aprajita Bhardwaj, Adv. Mr. Prabhat Kumar Rai, Adv. Mr. Aditya Goyal, Adv. Mr. Ujjawal Kumar Rai, Adv. Ms. Esha Kumar, Adv. Ms. Nidhi Singh, Adv. Mr. Utkarsh Chandra, Adv. Ms. K. Enatoli Sema, AOR Mr. Amit Kumar Singh, Adv. Ms. Chubalemla Chang, Adv. Mr. Prang Newmai, Adv. Mr. Harshad V. Hameed, AOR Mr. Dileep Poolakkot, Adv. Ms. Ashly Harshad, Adv. Mr. Nitin Gaur, Adv. Mr. Anshuman Ashok, Adv. Mr. Anshuman Ashok, AOR Mr. Sagar Parashar, Adv. Mr. Anshul Singh, Adv. Mr. Shashank Shekhar Singh, AOR Mr. Abhinav Singh, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Siddharth Dharmadhikari, Adv. Mr. Sourav Singh, Adv. Mr. Mayank Sapra, AOR Ms. Lalima Das, Adv. Mr. Karan Sharma, AOR Ms. Baani Khanna, AOR Mr. Sameer Abhyankar, AOR Mrs. Ayushi Bansal, Adv. Mr. Rahul Kumar, Adv. Ms. Yashika Sharma, Adv. Mr. Krishna Rastogi, Adv. Mr. Aakash Thakur, Adv. M/S Ag Veritas Law, AOR Mr. Gaichangpou Gangmei, Adv. Mr. Arjun D. Singh, Adv. Ms. Nisha Pandey, Adv. Mr. Yimyanger Longkumer, Adv. Mr. Maitreya Mahaley, Adv. Mr. J. Prasad, Adv. Mr. Kunal Chatterji, AOR Ms. Maitrayee Banerjee, Adv. Mr. Rohit Bansal, Adv. Mr. Pashupathi Nath Razdan, AOR Mr. Astik Gupta, Adv. Ms. Mandakini Ghosh, AOR Mr. Nikilesh Ramachandran, AOR Ms. Suparna Srivastava, Adv. Ms. Arshiya Sharma, Adv. Mr. Lokesh Sinhal, Sr. A.A.G. Mr. Akshay Amritanshu, AOR Mr. Nikunj Gupta, Adv. Ms. Pragya Upadhyay, Adv. Ms. Drishti Saraf, Adv. Ms. Aakanksha, Adv. Mr. Pradeep Misra, AOR Mr. Daleep Dhyani, Adv. Mr. Suraj Singh, Adv. Mr. Aditya Singh-1, AOR Mr. Shashi Bhushan Kumar, AOR Mr. Dinesh Kumar Prasad, Adv. Ms. Advaita Bhushan, Adv. Mr. Darpan Km, Adv. Ms. Amrita Sharma, Adv. Mr. Rajat Jonathan Shaw, Adv. Mr. Durgha Prakash, Adv. Ms. Easha Chandhok, Adv. Ms. Rashi Bansal, AOR Mr. M. T. George, AOR Mr. C. K. Rai, AOR Mrs. Anuradha Roy, Adv. Mr. Vinay Kumar Gupta, Adv. Mr. Sahil Chandra, AOR Mr. Rutwik Panda, AOR Ms. Nikhar Berrry, Adv. Ms. Anshu Malik, Adv. Ms. Nikhar Berry, Adv. Ms. Sunieta Ojha, AOR Ms. Gargi Kumar, Adv. Mr. Rajeev Kumar Panday, Adv. Mr. Zoheb Hossain, AOR Mr. Somanadri Goud Katam, AOR Mr. Rajat Srivastava, Adv. Mr. Sirajuddin, Adv. Mr. Sriram Krishna, AOR Ms. Anupama Dhurve, Adv. Mr. B. K. Satija, AOR Mr. Subhash Chandran K.R. AOR Ms. Krishna L.R., Adv. Mr. Ankit Roy, AOR Mr. Chinmoy Sharma, Adv. Ms. Diksha Rai, AOR Mr. Piyush Vyas, Adv. Purvat Wali, Adv. Mr. Irfan Hasieb, Adv. Mr. Krishnajyoti Deka, Adv. Mr. Vijay Deora, Adv.